<PAGE>
EXHIBIT 99.2
RISK FACTORS
Intense Competition May Erode Profit Margins
The wholesale distribution of pharmaceuticals and related healthcare
services is highly competitive. We compete primarily with the following:
. National wholesale distributors of pharmaceuticals such as Bergen
Brunswig Corporation, Bindley Western Industries, Inc., Cardinal Health,
Inc., and McKesson HBOC Corporation;
. Regional and local distributors of pharmaceuticals;
. Chain drugstores that warehouse their own pharmaceuticals;
. Manufacturers who distribute their products directly to customers; and
. Other specialty distributors.
Some of our competitors have greater financial resources and geographic
coverage than we have. Competitive pressures have contributed to a decline in
our gross profit margins on operating revenue from 5.42% in fiscal 1996 to
4.48% in fiscal 2000. This trend may continue and our business could be
adversely affected as a result.
Changing United States Healthcare Environment
Our products and services are intended to function within the structure of
the healthcare financing and reimbursement system currently being used in the
United States. In recent years, the healthcare industry has undergone
significant change in an effort to reduce costs. These changes include
increased use of managed care, cuts in Medicare, consolidation of competitors,
suppliers and customers, and the development of large, sophisticated purchasing
groups. We expect the healthcare industry to continue to change significantly
in the future. Some of these potential changes, such as a reduction in
governmental support of healthcare services or adverse changes in legislation
or regulations governing the delivery or pricing of prescription drugs,
healthcare services or mandated benefits, may cause healthcare industry
participants to greatly reduce the amount of our products and services they
purchase or the price they are willing to pay for our products and services.
Changes in pharmaceutical manufacturers' pricing or distribution policies could
also significantly reduce our income.
Concentration of Customers
During the fiscal year ended September 30, 2000, sales to the federal
government, including the Veterans Administration, accounted for 20% of our
total operating revenue. A growing portion of our increased sales this year has
been to that customer. Consequently, our sales and credit concentration have
significantly increased. Accordingly, any defaults in payment or a material
reduction in purchases of our products by that customer could have a
significant negative impact on our financial condition, results of operations
and liquidity. In addition, the Company has contracts with group purchasing
organizations ("GPOs") which represent a concentration of buying power among
multiple healthcare providers. Failure to win renewal of contracts with GPOs
could lead to a loss of revenue.
Debt and Interest Expense May Affect Earnings and Operations
Our balance sheet is leveraged with approximately $413.2 million in
aggregate long-term debt and $282.3 million of stockholders' equity at
September 30, 2000. This could negatively affect our operations in a number of
ways, including:
. We may be unable to obtain additional financing when needed for our
operations or when desired for acquisitions or expansions.
-1-
<PAGE>
. A large part of our cash flow from operations must be dedicated to
interest payments on our debt, thereby reducing funds available for other
corporate purposes.
. Since much of our debt is at variable or floating interest rates, a rise
in market interest rates will increase our interest expense.
. The level of our debt could limit our flexibility in responding to
downturns in the economy or in our business.
. The terms of our debt agreements limit our ability to borrow additional
money, pay dividends, divest assets and make acquisitions.
Additional Regulatory Risks
The healthcare industry is highly regulated at the local, state and federal
level. Consequently, AmeriSource is subject to the risk of changes in various
local, state, federal and international laws, which include the operating and
security standards of the United States Drug Enforcement Administration, the
Food and Drug Administration (the "FDA"), various state boards of pharmacy and
comparable agencies. These changes may affect AmeriSource's operations,
including distribution of prescription pharmaceuticals (including certain
controlled substances), operation of pharmacies, and packaging pharmaceuticals.
A review of AmeriSource's business by regulatory authorities may result in
determinations that could adversely affect the operations of AmeriSource.
AmeriSource is also subject to changes in various federal, state and local
laws, regulations and recommendations relating to safe working conditions,
laboratory practices, and the use and disposal of hazardous substances. Also,
the healthcare regulatory environment may change in a manner that would
restrict AmeriSource's existing operations, limit the expansion of its business
or otherwise adversely affect AmeriSource.
Key Managers May Leave The Company
AmeriSource depends on its senior and regional management. If some of these
employees leave the Company, operating results could be adversely affected.
Although AmeriSource has employment contracts with its Chief Executive Officer
and Chief Operating Officer, the Company cannot be assured that it will be able
to retain these or any other key employees.
Risks of Acquisition Strategy
Since our initial public offering in April 1995, we have completed several
acquisitions. Through these acquisitions and other investments, we have
expanded our geographic presence and our breadth of service offerings. We
expect to continue to acquire companies as an element of our growth strategy.
However, we are not currently engaged in substantive negotiations for material
acquisitions. Acquisitions involve certain risks that could cause our actual
growth to differ from our expectations. For example:
. We may not be able to continue to identify suitable acquisition
candidates or to complete acquisitions on favorable terms.
. We compete with other companies to acquire companies. We cannot predict
whether this competition will increase. If competition does increase,
there may be fewer suitable companies available to be acquired and the
price for suitable acquisitions may increase.
. We may not be able to successfully integrate acquired businesses in a
timely manner. We may also incur substantial costs, delays or other
operational or financial problems during the integration process.
-2-
<PAGE>
Possible Volatility of Our Stock and Note Prices
The stock market and the price of our common stock may be subject to
volatile fluctuations based on general economic and market conditions, industry
trends and company performance. The market price for our common stock may also
be affected by our ability to meet analysts' expectations. Failure to meet such
expectations, even slightly, could have an adverse effect on the market price of
our common stock. In the past, following periods of volatility in the market
price of a company's securities, securities class action litigation has often
been instituted against such a company. If similar litigation were instituted
against us, it could result in substantial costs and a diversion of our
management's attention and resources, which could have an adverse effect on our
business. Because of the volatility, we may fail to meet the expectations of our
stockholders or of securities analysts at some time in the future, and our stock
price could decline as a result.
Holding Company Structure
Substantially all of our properties are owned by, and substantially all of
our operations are conducted through, our subsidiaries. As a result, we depend
on dividends and other payments from our subsidiaries to satisfy our financial
obligations and make payments to our investors. The ability of our subsidiaries
to pay dividends and make other payments to us is subject to certain
restrictions under the terms of our debt agreements. See "Risk Factors--Debt and
Interest Expense May Affect Earnings and Operations". In addition, the ability
of a subsidiary to pay dividends to us will be limited by applicable law.
-3-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data.
The statement of operations data and balance sheet data for fiscal 1996 through
fiscal 1999 are derived from our audited consolidated financial statements. You
should read this information together with the "Management's Discussion and
Analysis of Financial Condition and Results of Operations", included elsewhere.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
--------------------------------------------------------
1996 1997(a) 1998(b) 1999(c) 2000(d)
---------- ---------- ---------- ---------- -----------
(amounts in thousands, except per share
amounts) (unaudited)
<S> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Operating revenue..... $5,806,126 $8,173,679 $9,373,482 $9,760,083 $11,609,995
Bulk deliveries to
customer warehouses.. 111,046 124,956 129,555 47,280 35,026
---------- ---------- ---------- ---------- -----------
Total revenue......... 5,917,172 8,298,635 9,503,037 9,807,363 11,645,021
Gross profit.......... 314,489 404,136 461,897 473,065 519,581
Operating expenses,
excluding
amortization......... 213,681 277,632 320,891 312,077 316,044
Operating income...... 100,507 125,445 138,931 159,002 201,557
Income before
extraordinary items.. 43,463 50,123 46,030 70,915 99,014
Net income............ 36,221 48,141 46,030 67,466 99,014
Earnings per share--
assuming dilution:
Income before
extraordinary items.. .90 1.00 .91 1.38 1.90
Net income............ .75 .96 .91 1.31 1.90
Weighted average
common shares
outstanding--assuming
dilution............. 48,376 50,301 50,713 51,683 52,020
Balance Sheet Data:
Cash and cash
equivalents and
restricted cash...... $ 73,832 $ 71,551 $ 90,344 $ 59,497 $ 120,818
Accounts receivable--
net.................. 405,929 550,824 509,130 612,520 623,961
Merchandise
inventories.......... 677,173 1,046,582 954,010 1,243,153 1,570,504
Property and
equipment--net....... 54,850 70,754 67,955 64,384 64,962
Total assets.......... 1,236,221 1,798,109 1,726,272 2,060,599 2,458,567
Accounts payable...... 749,481 1,070,673 947,016 1,175,619 1,584,133
Long-term debt, less
current portion...... 443,690 601,454 539,464 558,705 413,217
Stockholders' equity
(deficit)............ (34,856) 18,881 75,355 166,277 282,294
Total liabilities and
stockholders'
equity............... 1,236,221 1,798,109 1,726,272 2,060,599 2,458,567
</TABLE>
--------
(a) Includes the effect of $11.6 million of costs related to facility
consolidations and employee severance.
(b) Includes the effect of $18.4 million of merger costs and $8.3 million of
costs related to facility consolidations and employee severance.
(c) Includes the effect of $11.7 million of costs related to facility
consolidations and employee severance and $3.2 million of merger costs.
(d) Includes the effect of $1.1 million reversal of costs related to facility
consolidations and employee severance.
-4-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our consolidated
financial statements and notes thereto and "Selected Consolidated Financial
Data" included elsewhere.
Results of Operations
Year Ended September 30, 2000 Compared with Year Ended September 30, 1999
Operating revenue for the fiscal year ended September 30, 2000 increased
19% to $11.6 billion from $9.8 billion in the prior fiscal year. During the
fiscal year ended September 30, 2000, sales to health systems increased 22%,
sales to alternate site customers increased 59%, sales to independent community
pharmacy customers increased 11% and sales to the chain drugstore customer
group increased 12% compared to the prior year. During the fiscal year ended
September 30, 2000, sales to health systems and alternate site customers
accounted for 51% of total operating revenue, while sales to independent
community pharmacies accounted for 37% and sales to chain drugstores accounted
for 12% of the total. The increase in health systems revenue was primarily due
to 37% revenue growth with the Veterans Administration, which accounted for 19%
and 17% of the total operating revenue for the fiscal years ended September 30,
2000 and 1999, respectively. The balance of the health systems growth was due
to growth from existing relationships with group purchasing organizations.
Several new alternate site customers were added as a result of the Company's
sales reorganization in the prior year, which created a national and regional
alternate site sales force. Approximately 15% of the alternate site revenue
growth was from a new contract with a mail order facility, which started in the
third quarter of fiscal 2000. The increase in independent community pharmacy
and chain drugstore revenue was consistent with overall industry growth. Future
operating revenue growth may be impacted by customer consolidation and
competition within the industry.
The Company reports as revenue bulk shipments to customer warehouses,
whereby the Company acts as an intermediary in the ordering and subsequent
delivery of pharmaceutical products. Bulk deliveries decreased 26% to $35.0
million in fiscal 2000 compared to fiscal 1999. Due to the insignificant
service fees generated from these bulk shipments, fluctuations in volume have
no significant impact on operating margins.
Gross profit of $519.6 million in fiscal 2000 increased by 10% as compared
to the prior year due primarily to the increase in operating revenue. As a
percentage of operating revenue, the gross profit in fiscal 2000 was 4.48% as
compared to 4.85% in the prior year period. The decline in gross profit
percentage was primarily due to changes in the customer mix, which included
more lower-margin health systems business than in the prior year, and price
competition within the pharmaceutical distribution industry. Gross profit may
continue to be impacted by price competition, changes in customer and product
mix, distribution center performance and manufacturer pricing policies.
Selling and administrative expenses and depreciation increased by $20.0
million or 7% in fiscal 2000 as compared to the prior year, and decreased as a
percentage of operating revenue to 2.73% in fiscal 2000 from 3.04% in fiscal
1999. This improvement reflects the changing customer mix to more health
systems business, including the Veterans Administration, which is lower gross
margin business, but requires lower operating expense as a percentage of
revenue to service. The improvement also reflects warehouse efficiencies and
cost reductions related to the Company's fiscal 1998 and 1999 restructuring
efforts. These factors were offset in part by an increase in the bad debt
provision to $10.3 million for fiscal 2000 compared to a $7.0 million provision
in the prior year. The bad debt increase was primarily due to certain customer
business failures during the year. While the Company does not believe that this
higher level of customer business failure and resultant bad debt expense is
indicative of a trend, there can be no assurance that similar events will not
occur and result in additional bad debt expense in the future.
-5-
<PAGE>
In 1999, the Company acquired C.D. Smith Healthcare, Inc. During fiscal
2000, the Company closed C.D. Smith's Chicago, Illinois pharmaceutical
distribution facility and completed the consolidation of C.D. Smith's
pharmaceutical packaging business. In addition, the Company completed the
conversion of the remaining two C.D. Smith facilities to a centralized system
for data processing and other administrative services. A charge of $12.8
million was recognized in the fourth quarter of fiscal 1999 related to these
efforts, which included a $7.2 million write-down of goodwill and fixed assets
related to the Chicago facility, $3.5 million of contract and lease
cancellations and other costs primarily relating to the expected termination of
a non-cancelable supply contract, and $2.1 million of severance for
approximately 90 warehouse and administrative personnel to be terminated as a
result of the facility consolidation and centralization. As of September 30,
2000, all of the restructuring efforts have been completed except for the final
resolution of the non-cancelable supply contract which was settled in November
2000 for the anticipated amount. Severance accruals of $0.5 million related to
the fiscal 1999 charge were reversed into income during the third quarter of
fiscal 2000 primarily related to the decision to retain a manager previously
anticipated to be terminated.
In the fourth quarter of fiscal 1998, the Company began to centralize its
data processing, accounting, contract administration and purchasing functions,
reorganize its pharmaceutical distribution facilities into five regions, and
consolidate two pharmaceutical distribution facilities. A charge of $8.3
million was recognized in the fourth quarter of fiscal 1998 related to these
efforts and included severance of $3.3 million for approximately 350
administrative and warehouse personnel and asset write-downs and lease
cancellation costs of $5.0 million. As of September 30, 2000, all of the
Company's pharmaceutical distribution facilities have been converted to the
centralized system and substantially all of the 350 positions have been
eliminated. In the third quarter of fiscal 2000, the Company reversed
restructuring accruals related to the fiscal 1998 charge of approximately $0.6
million representing severance not paid to employees because they either left
the Company before receiving their benefits or took other positions within the
Company. This $0.6 million reversal, combined with the $0.5 million reversal of
the fiscal 1999 charge described above, is included in the facility
consolidations and employee severance line in the Company's statement of
operations. In fiscal 1999, the Company reversed $1.1 million of costs
originally accrued during fiscal 1997 for facility consolidations and employee
severance due to $0.8 million of proceeds in excess of estimates for disposed
assets and $0.3 million of severance settled for less than original estimates.
Operating income of $201.6 million for the year ended September 30, 2000
increased by 27% from the prior year in part because of the $1.1 million
restructuring charge reversal in fiscal 2000 as compared to the $14.9 million
in facility consolidations, employee severance and merger costs in fiscal 1999.
Excluding these items in both years, the increase in operating income was 15%
and the Company's operating margin was 1.73% in fiscal 2000 as compared to
1.78% in fiscal 1999. The decrease is due to the reduction in gross margin
described above offset in part by the decrease in selling and administrative
expense and depreciation as a percentage of operating revenue.
Interest expense of $41.9 million in fiscal 2000 represents an increase of
6% compared to the prior year. The increase from the prior year expense
reflects higher interest rates offset in part by lower average levels of debt
and lower borrowing spreads. The increase in average market interest rates
during fiscal 2000 was approximately 106 basis points compared to fiscal 1999.
Average borrowings during the year ended September 30, 2000 were $611 million
as compared to average borrowing of $625 million in the prior fiscal year.
Interest expense-adjustment of common stock put warrant to fair value of $0.3
million in the prior year did not recur in the current fiscal year due to the
conversion of the underlying warrant to common stock in the fourth quarter of
fiscal 1999.
Income tax expense of $60.7 million in fiscal 2000 reflected an effective
tax rate of 38.0% versus 40.6% in the prior fiscal year. The reduction in the
effective rate was primarily due to the effect of the non-deductible goodwill
write-down and merger costs which occurred in fiscal 1999.
-6-
<PAGE>
Income before extraordinary items of $99.0 million represents an increase
of 40% over the prior year. Excluding facility consolidation and employee
severance and merger costs in both years, income before extraordinary items of
$98.3 million increased 19% compared to the prior fiscal year. Net income per
share (assuming dilution) increased 45% from the prior year to $1.90 per share
as compared to $1.31 per share in the prior year.
Year Ended September 30, 1999 Compared with Year Ended September 30, 1998
Operating revenue for the fiscal year ended September 30, 1999 increased 4%
to $9.8 billion from $9.4 billion in fiscal 1998. During the fiscal year ended
September 30, 1999, sales to health systems and alternate site customers
increased 11%, sales to independent community pharmacies increased 8%, and
sales to the chain drugstore customer group decreased 22%, as compared with the
prior fiscal year. During the fiscal year ended September 30, 1999, sales to
health systems and alternate site customers accounted for 48% of total
operating revenue, while sales to independent community pharmacies accounted
for 39% and sales to chain drugstores accounted for 13% of the total. Revenue
growth for fiscal 1999 was adversely affected by the termination of service
contracts with two large warehousing chains and one large mail order customer
during the third quarter of fiscal 1998. Two of these customers were acquired
by companies serviced by other pharmaceutical distributors. Excluding the
operating revenue in fiscal 1998 from these three customer losses, operating
revenue would have increased 12% in the fiscal year ended September 30, 1999
compared to fiscal 1998. Health systems revenue, excluding alternate site
facilities, increased 17% in fiscal 1999 over 1998, slightly over one-half of
which was from the government sector due to the Company's expansion of its
relationship with the Veterans Administration. The federal government accounted
for 18% of total operating revenue in fiscal 1999 versus 15% in fiscal 1998.
The balance of the health systems growth was from existing relationships with
group purchasing organizations.
Bulk shipments decreased 64% to $47.3 million in fiscal 1999 compared to
fiscal 1998. Due to the insignificant service fees generated from these bulk
shipments, fluctuations in volume have no significant impact on operating
margins.
Gross profit of $473.1 million in fiscal 1999 increased by 2% compared to
fiscal 1998. As a percentage of operating revenue, the gross profit in fiscal
1999 was 4.85% as compared to 4.93% in the prior year. The decline was caused
by the shift in the customer mix as well as a reduction in selling margin due
to continued competition in the industry.
Selling and administrative expenses and depreciation increased by $3.0
million or 1% in fiscal 1999 compared to the prior fiscal year, and as a
percentage of operating revenue were 3.04% and 3.14% in fiscal 1999 and 1998,
respectively. The decrease as a percentage of operating revenue from the prior
year was due to the shift in customer mix away from warehousing chains,
resulting in decreases in warehouse and delivery expense compared to the prior
year, as well as continued productivity improvements from the Company's cost
reduction initiatives. These reductions combined with a reduction in bad debt
expense of $3.0 million offset costs incurred during the fiscal year ended
September 30, 1999 of $5.8 million related to the Company's centralization
process described above.
In addition to the facility consolidation and employee severance costs of
$12.8 million described above, the Company incurred merger costs of $3.2
million in the fourth quarter of fiscal 1999 in connection with its acquisition
of C.D. Smith, consisting primarily of investment banking, accounting and legal
fees. In fiscal 1998, the Company and McKesson HBOC jointly terminated a
definitive merger agreement signed in September 1997 after the Federal Trade
Commission obtained an injunction halting the proposed merger. Merger-related
costs consisting of professional fees and stay-put bonuses totaling $18.4
million were expensed in the fourth quarter of fiscal 1998 as a result of the
termination of the McKesson HBOC merger agreement.
-7-
<PAGE>
Operating income of $159.0 million in fiscal 1999 increased by 14% from the
prior year. The Company's operating margin increased to 1.63% in fiscal 1999
from 1.48% in fiscal 1998 primarily due to the reduction in merger costs from
$18.4 million in fiscal 1998 to $3.2 million in fiscal 1999.
Interest expense of $39.4 million in fiscal 1999 represents a 22% decrease
from the prior year due to a combination of lower borrowing rates on variable-
rate debt facilities as well as reduced average borrowings. Average borrowing
rates under the Company's variable-rate debt facilities declined approximately
50 basis points from the prior fiscal year due to market interest rate declines
early in fiscal 1999 as well as the effect of a step-down of 12.5 basis points
achieved under the revolving credit facility and the replacement of the
Company's receivables securitization facility with a lower cost facility during
the fiscal year. In addition, the Company extinguished higher-rate C.D. Smith
debt with its variable-rate debt in the fourth quarter of fiscal 1999. Average
borrowings decreased $89 million from $714 million in fiscal 1998 to $625
million in fiscal 1999 due primarily to continued emphasis on asset management.
Interest expense-adjustment of common stock put warrant to fair value
declined to $0.3 million in fiscal 1999 from $7.8 million in fiscal 1998. The
fair value of the common stock put warrant was based on the value of the
underlying common stock of C.D. Smith prior to the merger with AmeriSource. The
warrant was exercised and converted into common stock in the fourth quarter of
fiscal 1999.
Income tax expense of $48.4 million in fiscal 1999 reflected an effective
tax rate of 40.6% versus 43.0% in the prior fiscal year. The reduction in the
effective rate was due to the reduction in the non-deductible interest expense-
adjustment of common stock put warrant to fair value described above.
Income before extraordinary items increased to $70.9 million in fiscal 1999
from $46.0 million in fiscal 1998. Income before extraordinary items per share-
assuming dilution increased to $1.38 in fiscal 1999, a 52% increase from fiscal
1998 primarily due to the reduction in merger costs and interest expenses
discussed above.
Extraordinary items-early retirement of debt of $3.4 million, net of income
tax benefits of $2.0 million, in fiscal 1999, relates to the extinguishment of
long-term debt assumed in the acquisition of C.D. Smith in the fourth quarter
of fiscal 1999 as well as the replacement of the Company's prior receivables
securitization facility with a new receivables securitization facility
described below.
Liquidity and Capital Resources
During the year ended September 30, 2000, the Company's operating
activities generated $216.6 million in cash as compared to $3.0 million
generated in fiscal 1999. Cash generation from operations in fiscal 2000
resulted from an increase of $416.0 million in accounts payable, accrued
expenses and income taxes offset by increases in accounts receivable of $23.8
million and merchandise inventories of $327.4 million. The increase in accounts
payable, accrued expenses and income taxes in excess of the increase in
merchandise inventories was due to a 4% increase in days payable outstanding
during the year due to the centralization of accounts payable processing and
the timing of vendor purchases. Accounts receivable (net) increased only 2%
despite the 19% revenue increase due to the change in customer mix to quicker
paying health systems customers and the collection of a disputed receivable.
Merchandise inventories increased 26% reflecting the changes in customer mix
and to support anticipated new customer contracts, including additional
business with the Novation group purchasing organization, and seasonal buying
opportunities.
During the year ended September 30, 1999, the Company's operating
activities generated $3.0 million in cash as compared to $120.9 million
generated in fiscal 1998. Cash generation from operations in fiscal 1999 was
impacted by an increase in accounts receivable of $111.7 million primarily due
to the 15% growth in operating revenue in the fourth quarter of fiscal 1999 as
compared to the similar period in the prior year as well as the $289.1 million
increase in merchandise inventories which was offset in part by the
-8-
<PAGE>
$246.3 million increase in accounts payable, accrued expenses and income taxes.
Merchandise inventories increased to support new customer contracts, provide
for seasonal buying opportunities and provide for year 2000 supply concerns. A
decrease in restricted cash of $41.8 million in fiscal 1999 due to the
extinguishment of the Company's prior receivables securitization facility also
offset the increase in receivables and inventories.
During the year ended September 20, 1998, the Company's operating
activities generated $120.9 million in cash primarily due to a decrease in
accounts receivable of $72.0 million. The reduction in accounts receivable was
due to a combination of improved collection efforts and the loss of the three
major customers in fiscal 1998 described above. A decrease in merchandise
inventory in fiscal 1998 of $133.6 million was offset by a related decrease of
$168.0 million in accounts payable, accrued expenses, and income taxes. These
decreases were also impacted by the non-renewal of service contracts with three
large customers in fiscal 1998 as well as the reversal of the fiscal 1997 year-
end build-up of inventory related to the Company's expansion of its Thorofare,
New Jersey distribution facility.
The Company paid a total of $3.6 million, $5.2 million and $6.1 million of
severance, contract, and lease cancellation and other costs in fiscal 2000,
1999 and 1998, respectively, related to its fiscal 1999, 1998 and 1997 cost
reduction plans discussed above. Severance accruals of $0.1 million and
remaining contract and lease obligations of $3.0 million at September 30, 2000
are included in accrued expenses and other.
Capital expenditures for the fiscal years ended September 30, 2000, 1999
and 1998 were $16.6 million, $15.8 million and $12.1 million, respectively, and
relate principally to investments in warehouse improvements, information
technology and warehouse automation. Similar expenditures of approximately $20
to $25 million are expected in fiscal 2001.
During fiscal 2000, the Company and three other healthcare distributors
formed an Internet-based company that is an independent, commercially neutral
healthcare product information exchange focused on streamlining the process
involved in identifying, purchasing and distributing healthcare products and
services. The Company contributed $3.6 million to the joint venture in fiscal
2000 and its ownership interest of approximately 22% is being accounted for
under the equity method. The Company has committed to contribute approximately
$8.0 million over the next one to two years before the entity is expected to
become self-funding.
In fiscal 1998, C.D. Smith acquired the equity interests of the General
Drug companies for $28.0 million, which acquisition was financed through
borrowings of $16.0 million under its credit facility and the issuance of a
subordinated note for $12.0 million. In addition, C.D. Smith refinanced
approximately $39.5 million of indebtedness of the General Drug companies.
In fiscal 2000 and fiscal 1998, cash used by financing activities
represented net repayments of the Company's revolving credit facility from cash
provided by operations. Cash provided by financing activities during fiscal
1999 represents borrowings under the Company's revolving credit and receivable
securitization facilities primarily to fund its working capital requirements.
In connection with its acquisition of C.D. Smith in fiscal 1999, the Company
extinguished approximately $78 million of C.D. Smith's long-term debt with
borrowings under its revolving credit facility.
At September 30, 2000, borrowings under the Company's $500 million
revolving credit facility were $20.0 million and borrowings under its $400
million receivables securitization facility were $385.0 million. The revolving
credit facility expires in January 2002 and provides for interest rates ranging
from LIBOR plus 25 basis points to LIBOR plus 125 basis points based upon
certain financial ratios. In May 1999, the Company entered into a new $325
million receivables securitization facility to replace its previous facility.
The new facility had an initial term of three years and interest rates are
based on prevailing market rates for short-term commercial paper plus a program
fee of 38.5 basis points. During fiscal 2000, the Company
-9-
<PAGE>
amended its receivables securitization facility to provide an additional $75
million of borrowing capacity, increasing total commitments under this facility
from $325 million to $400 million and also extended the expiration date to May
2003. The receivables securitization facility represents a financing vehicle
utilized by the Company because of the availability of attractive interest
rates relative to other financing sources. The Company securitizes its trade
accounts and note receivables, which are generally non-interest bearing, in
transactions that do not qualify as sales transactions under SFAS No. 125. In
October 2000, the Company entered into a short-term supplemental $200 million
senior secured revolving credit agreement with interest at a rate equal to
LIBOR plus 137.5 basis points. This agreement expires April 30, 2001 and is
intended to fund seasonal inventory purchases if necessary.
The Company's primary exposure to market risk consists of changes in
interest rates on borrowings. An increase in interest rates would adversely
affect the Company's operating results and the cash flow available after debt
service to fund operations and expansion and, if permitted to do so under its
revolving credit facility, to pay dividends on its capital stock. The Company
enters into interest rate protection agreements from time to time to hedge the
exposure to increasing interest rates with respect to its long-term debt
agreements. The Company provides protection to meet actual exposure and does
not speculate in derivatives. There were no such agreements in effect at
September 30, 2000. For every $100 million of unhedged variable rate debt, a 75
basis point increase in interest rates would increase the Company's annual
interest expense by $0.75 million.
The Company's operating results have generated sufficient cash flow which,
together with borrowings under its debt agreement and credit terms from
suppliers, have provided sufficient capital resources to finance working
capital and cash operating requirements, fund capital expenditures, and fund
the payment of interest on outstanding debt. The Company's primary ongoing cash
requirements will be to finance working capital, fund the payment of interest
on indebtedness, and fund capital expenditures and routine growth and expansion
through new business opportunities. Future cash flows from operations and
borrowings are expected to be sufficient to fund the Company's ongoing cash
requirements.
The Company is subject to certain contingencies pursuant to environmental
laws and regulations at one of its former distribution centers that may require
remediation efforts. In fiscal 1994, the Company accrued a liability of $4.1
million to cover future consulting, legal and remediation, and ongoing
monitoring costs. The accrued liability ($3.8 million at September 30, 2000),
which is reflected in other long-term liabilities on the accompanying
consolidated balance sheet, is based on an estimate of the extent of
contamination and choice of remedy, existing technology, and presently enacted
laws and regulations. However, changes in remediation standards, improvements
in cleanup technology, and discovery of additional information concerning the
site could affect the estimated liability in the future.
Recently Issued Financial Accounting Standards
In fiscal 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," as amended in fiscal 2000 by SFAS No. 138
"Accounting for Certain Derivative Instruments and Certain Hedging Activities,"
which requires companies to recognize all derivatives as either assets or
liabilities in the balance sheet and measure such instruments at fair value.
The provisions of SFAS No. 138 are effective for fiscal years beginning after
June 15, 2001. Adoption of this statement is not expected to have a material
impact on the consolidated financial statements or related disclosures.
In December 1999, the staff of the Securities and Exchange Commission
issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in
Financial Statements" which requires adoption during the fourth quarter of
fiscal 2001. At this time, the Company does not anticipate that the adoption of
SAB 101 will have a material impact on the consolidated financial statements.
The Company will continue to analyze the impact of SAB 101, including any
amendments or further interpretation, based upon the relevant facts and
circumstances at the time of adoption.
-10-
<PAGE>
In September 2000, the FASB issued SFAS No. 140 "Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities" which
replaces SFAS No. 125 that the Company currently follows to account for its
receivables securitization facility. The accounting requirements of this
statement are effective for transfers occurring after March 31, 2001. Adoption
of this statement is not expected to impact the Company's treatment of its
receivables securitization facility as a financing transaction and any effect
is expected to be limited to the form and content of its disclosures.
BUSINESS
AmeriSource Health Corporation is a holding company and substantially all
of its operations are conducted through its direct wholly-owned subsidiary,
AmeriSource Corporation. We are a leading wholesale distributor of
pharmaceutical products and related healthcare solutions in the United States.
We provide services to health systems (hospitals and other acute care
facilities), alternate site customers (mail order facilities, nursing homes,
clinics and other non-acute care facilities), independent community pharmacies
and chain drugstores. We believe we are the largest provider of pharmaceuticals
to the health systems market.
We serve customers nationwide through 21 pharmaceutical distribution
facilities and three specialty products distribution facilities. We are
typically the primary source of supply for pharmaceutical and related products
to our customers. We offer a broad range of solutions to our customers and
suppliers designed to enhance the efficiency and effectiveness of their
operations, allowing them to improve the delivery of healthcare to patients and
consumers.
Over the past five years we have grown significantly, primarily as a result
of overall industry growth, acquisitions, and a focused business strategy that
has created market share gains in existing markets. During that period, our
operating revenue has increased at a compound annual growth rate of 18.9%, and
our operating income (before unusual items) has increased at a compound annual
growth rate of 15.1%.
AmeriSource Health Corporation was incorporated in Delaware in 1988. The
address of the principal executive office of the Company is 1300 Morris Drive,
Suite 100, Chesterbrook, PA 19087. The telephone number is (610) 727-7000 and
our web site is www.amerisource.com.
Business Strategy
AmeriSource's business strategy is anchored in national pharmaceutical
distribution and reinforced by the value-added business solutions it provides
its customers and suppliers. This focused strategy has resulted in significant
business expansion over the past five years and the Company believes it is well
positioned to continue to grow revenue and increase operating income through
the execution of the following key elements of its business strategy:
. Increasing Market Share in Existing Markets. The Company believes that it
is well-positioned to continue to grow in its existing markets by: (i)
providing superior distribution services to its customers and suppliers;
(ii) delivering value-added solutions which improve the efficiencies and
competitiveness of both customers and suppliers, allowing the supply
chain to better deliver healthcare to patients and consumers; (iii)
focusing on market-based customer groups in order to deliver the specific
programs and services unique to each group; (iv) continuing to expand
geographically by further penetrating selected market areas where the
Company has only recently entered; (v) maintaining its low-cost operating
structure to ensure that the Company's services are priced competitively
in the marketplace; (vi) continuing to develop and acquire new value-
added solutions for customers and suppliers; and (vii) maintaining its
decentralized operating structure to respond to customers' needs more
quickly and efficiently and to ensure the continued
-11-
<PAGE>
development of local and regional management talent. These factors have
allowed AmeriSource to compete effectively in the marketplace and generate
above-average industry sales growth over the last five years.
. Acquisition Opportunities. The Company believes that opportunities may
arise to acquire local and regional distribution companies or other
companies which deliver value-added solutions to customers or suppliers.
. Continuing Growth of Healthcare Solutions for Customers. AmeriSource
works closely with customers to develop an extensive range of healthcare
solutions both for specific customer groups and across the customer base.
In addition to enhancing the Company's profitability, these solutions
increase customer loyalty and strengthen AmeriSource's overall role in
the pharmaceutical supply channel. These solutions include: the ECHO(R)
Suite, a proprietary software system providing sophisticated ordering and
inventory management assistance to institutional and retail customers and
including iECHO(R) for Internet access, iECHO(R) Plus for multiple sites,
ECHO(R) Inventory Module for physical inventory management, and other
ECHO(R) management tools; Family Pharmacy(R), which enables independent
community pharmacies and small chain drugstores to compete more
effectively through access to pharmaceutical benefit and merchandising
programs, disease management, pharmaceutical care services, as well as
familypharmacy.com the new e-commerce site which provides on-line
shopping; AmeriSource Select which provides best-priced generic products;
American Health Packaging, which delivers unit dose, punch card and unit-
of-use packaging for health systems, alternate site and retail customers;
Pharmacy Healthcare Solutions, which provides hospital consulting to
improve operational efficiencies and RECOVERx, a program for recovering
indigent patient pharmaceutical reimbursements; Diabetes Shoppe and
Diabetes Corner(TM), which provide independent and chain pharmacies with
an array of products diabetics need; Rita Ann, the fragrance and cosmetic
specialty distributor with a wide variety of prestige products; and
Health Services Plus, which delivers a comprehensive supply of
injectables, vaccines, plasma and oncology products to a variety of
providers of healthcare. In addition, the Company owns a 19.9% interest
in Telepharmacy Solutions, Inc., formerly ADDS, Inc., a leading provider
of e-commerce medications management solutions for the healthcare
industry.
. Continuing Growth of Healthcare Solutions for Suppliers. Since
centralizing procurement activities over a year ago, AmeriSource has been
rapidly developing solutions for suppliers to improve the healthcare
supply chain. Programs for suppliers to rapidly distribute new products,
marketing services to expand usage and availability of products, custom
packaging, and data sharing are only a few of the value-added solutions
being developed to support suppliers. The Company believes these services
will continue to expand and contribute to its revenue and income growth.
. Maintain Low-Cost Operating Structure. AmeriSource believes it has one of
the lowest operating cost structures among its four major national
competitors. This year the Company completed a two-year effort to move
its 21 distribution centers to a common information technology platform.
This successful effort combined with the centralization of the
procurement, accounting and contract administration activities has
contributed significantly to reduced operating expenses as a percentage
of revenue. Specifically, the Company has reduced its selling and
administrative expenses and depreciation as a percentage of operating
revenue from 3.62% in fiscal 1995 to 2.73% in fiscal 2000. In addition,
AmeriSource believes it will continue to achieve productivity and
operating income gains as it invests in warehouse automation technology,
implements "best practices" in warehousing activities, and increases
operating leverage due to increased volume per Rx distribution facility.
Industry Overview
The Company has benefited from the significant growth of the full-service
drug wholesale industry in the United States. Industry sales grew from $30
billion in 1990 to $95 billion in 1999. While sales
-12-
<PAGE>
throughout the wholesale drug industry have grown, the number of pharmaceutical
wholesalers in the United States has declined significantly in recent years.
This consolidation trend may continue, with the industry's largest companies
increasing their percentage of total industry sales.
The factors contributing to the growth of the full-service drug wholesale
industry in the United States, and other favorable industry trends, include (i)
an aging population, (ii) the introduction of new pharmaceuticals, (iii) the
increased use of outpatient drug therapies, (iv) rising pharmaceutical prices,
and (v) expiration of patents for widely-used brand name pharmaceuticals.
Aging Population. The number of individuals over age 65 in the United
States grew from approximately 31 million in 1990 to approximately 34 million
in 2000 and is projected to increase to more than 39 million by the year 2010.
This age group suffers from a greater incidence of chronic illnesses and
disabilities than the rest of the population and is estimated to account for
approximately two-thirds of total healthcare expenditures in the United States.
Introduction of New Pharmaceuticals. Traditional research and development
as well as the advent of new research, production and delivery methods, such as
biotechnology and gene research and therapy, continue to generate new compounds
and delivery methods that are more effective in treating diseases. These
compounds have been responsible for significant increases in pharmaceutical
sales. The Company believes that ongoing research and development expenditures
by the leading pharmaceutical manufacturers will contribute to continued growth
of the industry.
Increased Use of Outpatient Drug Therapies. In response to rising
healthcare costs, governmental and private payors have adopted cost containment
measures that encourage the use of efficient drug therapies to prevent or treat
diseases. While national attention has been focused on the overall increase in
aggregate healthcare costs, the Company believes drug therapy has had a
beneficial impact on overall healthcare costs by reducing expensive surgeries
and prolonged hospital stays. Pharmaceuticals currently account for less than
11% of overall healthcare costs, and manufacturers' emphasis on research and
development is expected to continue the introduction of cost-effective drug
therapies.
Rising Pharmaceutical Prices. The Company believes that price increases by
pharmaceutical manufacturers will continue to equal or exceed the overall
Consumer Price Index. The Company believes that these increases will be due in
large part to the relatively inelastic demand in the face of higher prices
charged for patented drugs as manufacturers have attempted to recoup costs
associated with the development, clinical testing and Food and Drug
Administration ("FDA") approval of new products.
Expiration of Patents for Brand Name Pharmaceuticals. A significant number
of patents for widely-used brand name pharmaceutical products will expire in
the next several years. Such products are expected to be marketed by generic
manufacturers and distributed by the Company. We consider this a favorable
trend because generic products have historically provided a greater gross
profit margin opportunity than brand name products.
Operations
Decentralized Operating Structure. AmeriSource currently operates 21
pharmaceutical distribution facilities and three specialty products
distribution facilities, organized into five regions across the United States.
Unlike its more centralized competitors, the Company is structured as an
organization of locally managed profit centers. The Company believes that
operating economies of scale exist principally at the distribution facility
level. Management of each distribution facility has responsibility for its own
financial performance. The distribution facility's results, including earnings
and achievement of asset management goals, have a direct impact on management
compensation at these facilities. The distribution facilities utilize the
Company's corporate staff for marketing, data processing, financial,
purchasing, legal and executive management resources and corporate coordination
of asset and working capital management. In the fourth quarter of fiscal 1998,
the Company began to centralize its data processing, accounting, and
-13-
<PAGE>
contract administration and purchasing functions. As of September 2000, the
above functions of all drug distribution facilities have been centralized. The
Company believes that the centralization of these administrative functions will
result in future efficiencies without affecting the Company's decentralized
operations and management.
Sales and Marketing. The Company has over 250 sales professionals organized
regionally and specialized by four customer groups: health systems, alternate
site, independent community pharmacies and chain drugstores. Customer service
representatives are located in each distribution facility in order to respond
to customer needs in a timely and effective manner. In addition, a specially
trained group of telemarketing representatives makes regular contact with
customers regarding special promotions. AmeriSource's corporate marketing
department designs and develops the Company's array of value-added customer
solutions. Tailored to specific customer groups and under the banner of
"Delivering Healthcare Solutions", these programs can be further customized at
the distribution facility level to adapt to local market conditions. Corporate
sales and marketing also services national account customers through close
coordination with local distribution centers.
Facilities. Each of the Company's distribution facilities carries an
inventory suited to the needs of the local market. The efficient distribution
of small orders is possible through the extensive use of computerization and
modern warehouse techniques. These include computerized warehouse product
location, routing and inventory replenishment systems, gravity-flow racking,
mechanized order selection and efficient truck loading and routing. The Company
typically delivers its products to its customers on a daily basis. It utilizes
a fleet of owned and leased vans and trucks and contract carriers. Night
picking operations in its distribution facilities have further reduced delivery
time. Orders are generally delivered in less than 24 hours.
The following table presents certain information on a fiscal year basis
regarding the Company's operating units in the aggregate.
Fiscal Year Ended September 30,
---------------------------------------------
1996 1997 1998 1999 2000
-------- -------- -------- -------- ---------
(dollars in millions; square feet in
thousands)
Operating revenue................ $5,806.1 $8,173.7 $9,373.5 $9,760.1 $11,610.0
Number of Rx distribution
facilities...................... 21 22 23 22 21
Average revenue/Rx distribution
facility........................ $ 274.6 $ 366.9 $ 398.8 $ 430.8 $ 538.6
Total square feet (Rx
facilities)..................... 1,889.7 2,318.1 2,286.0 2,174.4 2,145.0
Average revenue/square foot (in
whole dollars)
(Rx facilities)................. $ 3,052 $ 3,482 $ 4,012 $ 4,359 $ 5,273
Customers and Markets. The Company has a diverse customer base that
includes health systems and alternate site customers, independent community
pharmacies and chain drugstores, including pharmacy departments of supermarkets
and mass merchandisers. AmeriSource is typically the primary source of supply
for its customers. In addition, the Company offers a broad range of value-added
solutions designed to enhance the operating efficiencies and competitive
positions of its customers, allowing them to improve the delivery of healthcare
to patients and consumers. The table below illustrates the change in the
Company's customer sales mix over the last five fiscal years.
<TABLE>
<CAPTION>
Fiscal Year Ended September 30,
-----------------------------------------------------------
1996 1997 1998 1999 2000
---------- ---------- ---------- ---------- -----------
(dollars in millions)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Health systems and
alternate site......... $2,675 46% $3,710 45% $4,200 45% $4,650 48% $ 5,927 51%
Independent community
pharmacies............. 2,057 35 2,929 36 3,567 38 3,855 39 4,278 37
Chain drugstores........ 1,074 19 1,535 19 1,606 17 1,255 13 1,405 12
------ --- ------ --- ------ --- ------ --- ------- ---
Total operating
revenue............. $5,806 100% $8,174 100% $9,373 100% $9,760 100% $11,610 100%
====== === ====== === ====== === ====== === ======= ===
</TABLE>
No single customer represented more than 5% of the Company's total
operating revenue during fiscal 2000, except for the federal government, which
includes the Veterans Administration, which
-14-
<PAGE>
accounted for approximately 20%. Including the federal government, the
Company's top ten customers represented approximately 28% of total operating
revenue during fiscal 2000. A profile of each customer class follows:
. Health Systems and Alternate Site. AmeriSource believes it is the
nation's largest distributor to the health systems market, which includes
hospitals and acute-care facilities and a growing provider to the
alternate site market, which includes mail order facilities, nursing
homes, clinics and other non-acute care facilities. Health systems and
alternate site facilities purchase large volumes of high-priced, easily
handled pharmaceuticals. The Company benefits from quick turnover of both
inventory and receivables and lower-than average operating expenses for
these customers. Sales to health systems and alternate site customers
have grown at a compound rate of 19.6% from fiscal 1995 through fiscal
2000.
. Independent Community Pharmacies. Independent community pharmacy owners
provide an attractive opportunity for the application of the Company's
value-added solutions. The Company's sales to independent customers have
risen at a compound rate of 21.7% from fiscal 1995 through fiscal 2000.
This is due to market growth within this customer group, AmeriSource's
acquisition activity, and the success of the Company's customized
marketing and merchandising programs, such as its Family Pharmacy(R)
program.
. Chain Drugstores. This class includes chain drugstores, including
pharmacy departments of supermarkets and mass merchandisers. The
Company's sales to chains have risen at a compound rate of 10.5% from
fiscal 1995 through fiscal 2000. This growth rate reflects new business
with non-warehousing retail chains as well as the growth of existing
retail chain customers. However, sales to chain drugstores decreased in
fiscal 1999 due to the termination of service contracts with two large
warehousing chain drugstores in fiscal 1998.
Suppliers. AmeriSource obtains pharmaceutical and other products from a
number of manufacturers, none of which accounted for more than approximately 9%
of its net sales in fiscal 2000. The five largest suppliers in fiscal 2000
accounted for approximately 28% of net sales. Historically, the Company has not
experienced difficulty in purchasing desired products from suppliers. The
Company has agreements with many of its suppliers which generally require the
Company to maintain an adequate quantity of a supplier's products in inventory.
The majority of contracts with suppliers are terminable upon 30 days notice by
either party. The loss of certain suppliers could adversely affect the
Company's business if alternate sources of supply were unavailable. The Company
believes that its relationships with its suppliers are good.
Management Information Systems. The Company has continually invested in
advanced management information systems and automated warehouse technology. The
Company's management information systems provide for, among other things,
electronic order entry by customers, invoice preparation and purchasing and
inventory tracking. As a result of electronic order entry, the cost of
receiving and processing orders has not increased as rapidly as sales volume.
The Company's customized systems strengthen customer relationships by allowing
the customer to lower its operating costs and by providing the basis for a
number of the value-added solutions the Company provides its customers,
including marketing data, inventory replenishment, single-source billing,
computer price updates and price labels. During fiscal 2000, the Company
completed converting the management information systems at its pharmaceutical
distribution facilities into one centralized management information system.
This initiative allowed the Company to improve its information capabilities and
eliminate redundant processing and computer operating expenditures. Management
plans to continue to make system investments to further improve its information
capabilities and meet its customer and operational needs.
Competition
AmeriSource engages in the wholesale distribution of pharmaceuticals and
related healthcare solutions in a highly competitive environment. The Company
competes with both national and regional
-15-
<PAGE>
distributors, some of which are larger and have greater financial resources
than AmeriSource. The Company's national competitors include Bergen Brunswig
Corporation, Bindley Western Industries, Inc., Cardinal Health, Inc., and
McKesson HBOC, Inc. In addition, the Company competes with regional and local
distributors, direct-selling manufacturers, warehousing chain drugstores, and
other specialty distributors. Competitive factors include value-added service
programs, breadth of product line, price, service and delivery, credit terms
and customer support. We expect that the pharmaceutical wholesale industry will
continue to undergo further consolidation.
Employees
As of September 30, 2000, the Company employed approximately 3,700 persons,
of which approximately 3,550 were full-time employees. Approximately 12% of
full and part-time employees are covered by collective bargaining agreements.
The Company believes that its relationship with its employees is good.
Regulatory and Environmental Matters
The United States Drug Enforcement Administration, the Food and Drug
Administration and various state boards of pharmacy regulate the distribution
of pharmaceutical products and controlled substances, requiring wholesale
distributors of these substances to register for permits and to meet various
security and operating standards. As a wholesale distributor of pharmaceuticals
and certain medical/surgical products, the Company is subject to these
regulations. The Company has received all necessary regulatory approvals and
believes that it is in substantial compliance with all applicable wholesale
distribution requirements.
The Company is aware that at its former Charleston, South Carolina
distribution center there is evidence of residual soil contamination remaining
from the fertilizer manufacturing process operated on that site by third
parties over thirty years ago. The Company's environmental consulting firm
conducted a soil survey and a groundwater study during fiscal 1994 and fiscal
1995. The results of the studies indicate that there is lead on-site at levels
requiring further investigation and potential remediation. A preliminary
engineering analysis was prepared by outside consultants during the third
quarter of fiscal 1994, and indicated that, if both soil and groundwater
remediation are required, the most likely cost is estimated to be $4.1 million.
Accordingly, a liability of $4.1 million was recorded during fiscal 1994 to
cover future consulting, legal and remediation and ongoing monitoring costs.
The Company is working with the appropriate state and federal regulatory
agencies regarding further tests and potential site remediation. That
negotiation, investigation and remediation could take several years and the
actual costs may differ from the liability that has been recorded. The accrued
liability ($3.8 million at September 30, 2000), which is reflected in other
liabilities in the Company's consolidated balance sheet, is based on the
present estimate of the extent of contamination, choice of remedy, and enacted
laws and regulations, including remedial standards; however, changes in any of
these could affect the estimated liability.
Properties
As of September 2000, the Company conducted its business from office and
operating unit facilities at 39 locations throughout the United States. In the
aggregate, the Company's operating units occupy approximately 2.7 million
square feet of office and warehouse space, of which approximately 0.9 million
square feet is owned and the balance is leased under lease agreements with
expiration dates ranging from 2000 to 2012. The Company's 21 pharmaceutical
distribution facilities range in size from approximately 20,000 square feet to
207,100 square feet. Leased facilities are located in the following states:
Alabama, Arizona, California, Delaware, Florida, Idaho, Indiana, Kentucky,
Massachusetts, Minnesota, New Jersey, Ohio, Oregon, Pennsylvania, Tennessee,
Texas, Virginia and West Virginia. Owned facilities are located in the
following states: Alabama, Illinois, Indiana, Kentucky, Maryland,
-16-
<PAGE>
Missouri, Ohio, Tennessee and Virginia. The Company utilizes a fleet of owned
and leased vans and trucks, as well as contract carriers to deliver its
products.
Legal Proceedings
In 1998 the Company sued a former customer which refused to pay invoices,
net of credit memos, totaling approximately $21 million for goods sold and
delivered. The former customer filed counterclaims alleging it suffered damages
as a result of certain performance problems affecting the Company. In January
2000, the Company settled all claims with the former customer. The terms of the
confidential settlement agreement did not have any adverse effect on the
Company's financial position or results of operations.
In November 1993, the Company was named a defendant, along with six other
wholesale distributors and twenty-four pharmaceutical manufacturers, in a
series of purported class action antitrust lawsuits brought by retail
pharmacies and alleging violations of various antitrust laws stemming from the
use of chargeback agreements. In addition, the Company and four other wholesale
distributors were added as defendants in a series of related antitrust lawsuits
brought by independent pharmacies and chain drugstores, which had opted out of
the class action cases. The Company also was named a defendant in parallel
suits filed in state courts in Minnesota, Alabama, Tennessee and Mississippi.
The federal class actions were transferred along with the individual and chain
drugstore cases to the United States District Court for the Northern District
of Illinois for consolidated and coordinated pretrial proceedings. In essence,
these lawsuits claimed that the manufacturer and wholesaler defendants
combined, contracted and conspired to fix the prices charged to retail
pharmacies for prescription brand name pharmaceuticals. Specifically,
plaintiffs claimed that the defendants used "chargeback agreements" to give
some institutional pharmacies discounts that allegedly were not made available
to retail drugstores. Plaintiffs sought injunctive relief, treble damages,
attorneys' fees and costs. In October 1994, the Company entered into a Judgment
Sharing Agreement with the other wholesaler and pharmaceutical manufacturer
defendants. Under the Judgment Sharing Agreement: (a) the manufacturer
defendants agreed to reimburse the wholesaler defendants for litigation costs
incurred, up to an aggregate of $9 million; and (b) if a judgment is entered
against both manufacturers and wholesalers, the total exposure for joint and
several liability of the Company is limited to the lesser of 1% of such
judgment or $1 million. In addition, the Company has released any claims which
it might have had against the manufacturers for the claims presented by the
Plaintiffs in these lawsuits. Subsequent amendments to the Judgment Sharing
Agreement have provided additional protection to the Company from litigation
expenses in exchange for updated releases. The Judgment Sharing Agreement
covers the federal court litigation as well as the cases which have been filed
in various state courts.
After a ten-week trial in the federal class action case, the Court granted
all of the defendants' motions for a directed verdict and dismissed the claims
the class plaintiffs had asserted against the Company and the other defendants.
The judgment entered in favor of the Company was affirmed on appeal.
The state cases are proceeding. The Minnesota case settled without any
payment or admission of liability by the Company. On November 29, 1999, the
trial court in Alabama dismissed all of the claims asserted against the Company
and the other wholesaler and manufacturer defendants in accordance with a
ruling from the Alabama Supreme Court. The Mississippi and Tennessee cases
remain pending, but are inactive.
On or about October 2, 1997, the group of independent pharmacies and chain
drugstores which had opted out of the class action, filed a motion with the
United States District Court for the Northern District of Illinois seeking to
add the Company and the other wholesale distributors as defendants in their
cases against the manufacturer defendants, which cases are consolidated before
the same judge who presides
-17-
<PAGE>
over the class action. This motion was granted and the Company and the other
wholesale distributors have been added as defendants in those cases as well. As
a result, the Company has been served with approximately 120 additional
complaints on behalf of approximately 4,000 pharmacies and chain retailers.
Discovery and motion practice is presently underway in all of these opt-out
cases. The Company believes it has meritorious defenses to the claims asserted
in these lawsuits and intends to vigorously defend itself in all of these
cases.
AmeriSource has been named as a defendant in four lawsuits based upon
alleged injuries attributable to a category of products typically referred to
as fen-phen. AmeriSource did not manufacture these products; however, prior to
an FDA recall, AmeriSource did distribute these products from several of its
vendors. In August 2000, the Company entered into an Indemnification Agreement
with one of the manufacturer defendants. Under the Indemnification Agreement,
the manufacturer agreed to reimburse the Company for past attorney's fees and
to indemnify and defend the Company going forward, except the manufacturer will
only indemnify the Company based on the percentage of liability assigned to its
products if: (a) verdicts are rendered against a phentermine manufacturer in at
least three cases where 10% of liability is apportioned to the phentermines; or
(b) verdicts are rendered against a phentermine manufacturer in 7 cases,
regardless of the percentage of liability.
The Company is a party to various lawsuits arising in the ordinary course
of business; however, the Company does not believe that the outcome of these
lawsuits, individually or in the aggregate, will have a material adverse effect
on its business or financial condition.
-18-
